Re-Evaluating Retirement Contributions

The federal tax system requires us to contribute to a federal retirement insurance fund plus a hospitalization insurance fund. I have described these two taxes differently but you know them as “social security” and “medicare” taxes, both mandated by the Federal Insurance Contributions Act or FICA.

The FICA insurance combined rate is 15.3% of each employee’s wage. Half of this rate is imposed on the employee, the other half on the employer. There is a limit to the wage subject to social security tax, which was up to $102,000 in wage. This limit increases every year.

The medicare tax has no wage or compensation limit. The program requires us to contribute for ten (10) years in order to get the entitlements; otherwise, we would have no retirement pension. These two taxes are what makes our “income taxes” rather high and need our closer attention.

And even if we are already receiving the entitlements, and we are still working, we continue to pay these taxes. A study has shown that the most a retiree could get will be his pension entitlement in the next fifteen (15) years, if he lives this long. However, he could have contributed to the program for more than forty (40) years. That is why we advice clients that contributing to the program far too long as an employee is wrong. And contributing more into it after already receiving the monthly entitlement is definitely wrong. We have developed certain strategic tax management plans for clients that will correct this imbalance and thus reduce these taxes. Invest your money into something else while it is early, but not on this program.

Another trapdoor to our hard-earned income are the “qualified retirement plans,”i.e., the 401-K, 403B, etc. plans. Yes, they are tax-free “set asides” from gross wages but with limits. The problem is, these retirements along with their earnings, and the employer’s contributions have all been taken away by the fund managers (20%) and the failure of the investment institutions (30%). Almost half of their values are gone, and it will take another generation, maybe even longer, to get their values back.

A few of my clients have decided not to put their money into these plans now. And we cannot blame them even as their contributions to these plans may reduce taxes. Our country needs to bring back the confidence to these retirement programs. May that confidence come back again soon?

Under the circumstances, we advice clients to set aside money “outside the box” where growth will be far better preserved. We suggest a new approach to retirement planning. Let us review your future plans to possibly give you better recommendations with your tax planning.

Another big trapdoor that reduces potential retirement savings is the housing costs, (rent, mortgage interest, property tax). These three items could be reduced, or at the very least they should be controlled and reviewed closely if it is worth paying their price. Rent must be sustained by income or revenue, mortgage interest should not be unreasonable, and property tax must be based on the lowest of measured income, real acquisition cost, or current fair market value of the property. The solutions to these items when available more often are not simple and requires time. Find out your options.

We can talk more of the above items if you like. But please put your thinking cap on first.

Angel Y. Dayan, EA, ABA, ATA, CPA is a Tax Problems Resolution Specialist. He is a Federally Authorized Tax Practitioner in 50 States (EA). He is an Accredited Business Accountant (ABA) an Accredited Tax Advisor (ATA), and Certified Public Accountant in Texas. He has a Masters Course in Tax Representation. He meets clients daily in his office at 150 East Olive Ave., Ste.-116 Burbank, California. He could be reached for appointment at (213)-365-1040.

Last 5 Posts by Angel Dayan

• Ruminating The New TaxTime - February 12th, 2010
• New Tax Changes Alert - February 1st, 2010
• Marikina Town Under Water - October 6th, 2009
• Manny Pacquiao and Taxes - August 19th, 2009
• Praying For Clients - August 10th, 2009